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Gold Fields soars on South Deep turnaround hopes - Business day

Friday, 20 November 2015

SHAREHOLDERS have cheered Gold Fields’ strong operational performance, particularly at its problematic South Deep mine in SA, and its falling costs outlook which will boost free cash flows.

Gold Fields shares shot up to R39.98 on Thursday before closing the session 17% higher at R36.26 as the firm appeared to be getting to grips with South Deep, its last remaining mine in SA, and an asset in development that it has struggled for years to bring to account.

It generated net free cash of $75m in the September quarter, up from $30m in the previous one. South Deep’s gold output shot up 42% to 55,000oz, and CEO Nick Holland said the mine remained firmly on track to break even late next year.

Gold Fields has spent $4.2bn at South Deep since buying it in 2006, and its 40-million ounces of reserves and 80-million ounces of resources meant it was its "most important asset", JP Morgan analysts Allan Cooke and Abhishek Tiwari said in a note. "A strong operating performance could lead to a substantial improvement in free cash flow," they said of the mine.

"The mine has multiple operational issues at present, but if these can be remedied quickly by new operational management, the group’s rating will benefit if the mine begins to generate free cash flow."

Gold Fields was tweaking the way it was extracting the enormous reef package it had targeted for a purely mechanised mining method, but it was revisiting the narrow Ventersdorp Contact Reef, which it stopped mining in a conventional, labour-intensive way in 2008, said Mr Holland.

The reef, which contained about 5-million ounces at a grade of about 10 grams a tonne, could be used to fill the 300,000-tonnes-a-month capacity in the shaft and plant provided the economics stack up to restart mining it, he said, adding a study was under way.

Gold Fields would know the results of another study early next year into whether it should spend heavily in deepening and widening its main pit at its Damang mine in Ghana or put it into care and maintenance because it was not generating cash at the prevailing dollar gold price, he said.

The mine, which employs 1,000 staff and 1,000 contractors, was, next to South Deep, the only loss-making mine in the company’s portfolio.

One analyst suggested Gold Fields would have to spend $100m to reach the high-grade ore below the pit, pushing back the walls of the pit and engaging in a huge earth-moving exercise to remove waste over 24 months, but Mr Holland said: "I’d disregard that $100m number. The study isn’t finished yet."

Mr Holland said in November 2013 if Damang did not become profitable it would look at mothballing the operation, but an improved performance last year delayed the decision.

"I have no problem with mothballing Damang because we can wait for the right gold prices that will give optionality and leverage to do this," he said on Thursday, adding early-stage talks had started with the government, unions and communities about the two options.

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